PATHFINDER BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) (Form 10-Q)
The Company is a
Marylandcorporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank(the "Bank"), a New York Statechartered commercial bank, which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc.("PRMC") and Whispering Oaks Development Corp.All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC("Fitzgibbons" or "Agency"), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own, is accounted for separately as a noncontrolling interest within the consolidated financial statements. At March 31, 2022, the Company and subsidiaries had total consolidated assets of $1.33 billion, total consolidated liabilities of $1.22 billionand shareholders' equity of $109.1 million, plus noncontrolling interest of $390,000, which represents the 49% of FitzGibbons not owned by the Company. The following discussion reviews the Company's financial condition at March 31, 2022and the results of operations for the three month period ended March 31, 2022and 2021. Operating results for the three months ended March 31, 2022are not necessarily indicative of the results that may be expected for the year ending December 31, 2022or any other period. The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commissionon March 25, 2022("the consolidated annual financial statements") as of December 31, 2021and 2020 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.
Statement Regarding Forward-Looking Statements
Certain statements contained herein are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:
• Credit quality and the effect of credit quality on the adequacy of our
provision for loan losses;
• Deterioration of the financial markets which could lead to impairments
relating to our securities portfolio; • Competition in our primary market areas;
• Changes in interest rates, inflation and national or regional economic conditions
• Changes in the monetary and fiscal policies of the
policies of the
- 47 - --------------------------------------------------------------------------------
• Important government regulations, legislation and potential changes
• A reduction in our ability to generate or create income-generating assets
as a result of compliance with heightened capital standards; • Increased cost of operations due to greater regulatory oversight,
supervision and examination of banks and bank holding companies, and
deposit insurance premiums;
• Cyberattacks, computer viruses and other technological threats that may
violate the security of our websites or other systems;
• Technological changes that may be more difficult or costly than expected;
• Government action in response to the COVID-19 pandemic and its effects on
our business and operations, including vaccination mandates and their effects on our workforce, human capital resources and infrastructure;
• Limitations on our ability to expand consumer product and service offerings
due to stricter consumer protection laws and regulations; and
• Other risks described here and in other reports and statements we file
SEC. Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
World Health Organization(the "WHO") declared COVID-19 a global pandemic on March 11, 2020. In the United States, by the end of March 2020, the rapid spread of the COVID-19 virus invoked various Federal and New York Stateauthorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included severe restrictions on international and domestic travel, limitations on public gatherings, implementation of social distancing and sanitization protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. To varying degrees, these very substantial mandated curtailments of social and economic activity had been progressively relaxed in the United Statesduring 2021, and were partially reinstated in some cases due to new variant breakouts in various areas of the country. This relaxation of the social and economic restrictions followed the increasingly wide-spread availability of vaccines that were first made available to the most vulnerable population segments in late 2020. These vaccines are generally considered to be effective in reducing the severity of the infection, if contracted, and in slowing the rate of spread of the coronavirus. However, the percentage of unvaccinated people in the United States, and the potential for future mutations of the coronavirus, remain significant long-term public health and economic concerns. As a result of the initial and continuing outbreak, and governmental responses thereto, the spread of the coronavirus caused us to modify our business practices, in some cases substantially. These modifications included restrictions on employee travel, employee work locations, and the cancellation of physical participation in meetings, events and conferences. During the most restrictive periods during the pandemic, the Company had many of its employees working remotely and significantly reduced physical customer contact with employees and other customers until the second quarter of 2021, when New York Staterelaxed the majority of its safety mandates. At March 31, 2022, the Bank's offices and branches were fully accessible to the public. In the best interests of our employees, customers, and business partners, we will take further action, focused on safety, as may be required in the future by government authorities. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed into law on March 27, 2020, provided financial assistance in various forms to both businesses and consumers, including the establishment and funding of the Paycheck Protection Program ("PPP"). In addition, the CARES Act also created many directives affecting the operations of financial service providers, such as the Company, including a forbearance program for federally-backed mortgage loans and protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies issued guidance encouraging financial institutions to work prudently with borrowers whowere, or may be, unable to meet their contractual payment obligations because of the - 48 - -------------------------------------------------------------------------------- effects of COVID-19. The Company has worked to assist its business and consumer customers affected by COVID-19. While the CARES Act is widely-considered to have been beneficial to the economic recovery and supportive of the Company's business activities, the long-term effect of this legislation on the operations of the Company cannot be determined with certainty at this time. As of the date of this filing, variants of the coronavirus, referred to as the "Omicron" variant, along with sub-variants of Omicron, have emerged in the United Statesand remain a concern in some regions and potentially, throughout the country. These variants are believed to be more contagious than earlier variants of the coronavirus. Certain previously-relaxed social distancing and safety protocols may have to be reinstated locally or in other regions of the country and it is possible that such protocols will be reinstated broadly in the future. The economic effects of these varying protocol reinstatement actions on the Company's operations cannot be determined with certainty at this time.
Paycheck Protection Program
The Bank participated in all rounds of the PPP funded by the
U.S. Treasury Departmentand administered by the U.S.SBA pursuant to the CARES Act and subsequent legislation. PPP loans have an interest rate of 1.0% and a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for qualifying expenses. The PPP ended in May 2021. Information related to the Company's PPP loans are included in the following tables: Unaudited For the three months ended (In thousands, except number of loans) March 31, 2022 March 31, 2021 Number of PPP loans originated in the period - 421 Funded balance of PPP loans originated in the period $ - $
Number of PPP loans forgiven in the period 93 206 Balance of PPP loans forgiven in the period $ 6,096 $
Deferred PPP fee income recognized in the period $ 278 $ 412 For the three months ended (In thousands, except number of loans) March 31, 2022 March 31, 2021 Unearned PPP deferred fee income at end of period $ 440 $ 1,468
(In thousands, except number of loans) Number Balance Total PPP loans issued since inception 1,177
Total PPP loans canceled since inception 1,025
Total PPP Loans Outstanding
Application of critical accounting estimates
The Company's consolidated quarterly financial statements are prepared in accordance with accounting principles generally accepted in
the United Statesand follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated quarterly financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by unaffiliated third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management. - 49 - -------------------------------------------------------------------------------- The most significant accounting policies followed by the Company are presented in Note 1 to the annual audited consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated quarterly financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses, deferred income taxes, pension obligations, the evaluation of investment securities for other than temporary impairment, the estimation of fair values for accounting and disclosure purposes, and the evaluation of goodwill for impairment to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available. The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.
Our provision for loan and lease losses policy establishes criteria for selecting loans to be assessed for impairment based on the following:
Residential and consumer loans:
• All loans rated lower or worse, on non-recognition status and above our
total related credit ("TRC") threshold balance of
$300,000. • All Troubled Debt Restructured Loans.
Commercial lines and loans,
• All loans rated lower or worse, on non-recognition status and above our
TRC threshold balance of
$100,000. • All Troubled Debt Restructured Loans. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value. For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the probable incurred loss for each risk-rating category. Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. On April 7, 2021, the New York State Legislatureapproved comprehensive tax legislation as part of the State's 2022 Fiscal Year budget. The legislation includes increased taxes on businesses and high-income individuals among other tax law revisions. Other provisions include amendments to the real estate transfer tax. The legislation increases the corporate franchise tax rate to 7.25% from 6.5% for tax years beginning on or after January 1, 2021and before January 1, 2024for taxpayers with a business income base greater than $5.0 million. In addition, the previously scheduled phase-out of the capital base tax has been delayed. The rate of the capital base was set to be reduced to 0% starting in 2021. The legislation imposes the tax at the rate of 0.1875% for tax years beginning on or after January 1, 2021and before January 1, 2024, with the 0% rate to take effect in 2024. Management continues to evaluate the projected impact of this newly - 50 - -------------------------------------------------------------------------------- issued New York Statetax legislation on the Company's financial condition and results of operations and believes that these provisions require an increase in the Company's income tax expense for the three months ended March 31, 2022, thereby requiring an increase in the Company's effective tax rate to 21% for the three months ended March 31, 2022as compared to the effective tax rate of 20.6%, for the same three month period in 2021. The Company's effective tax rate typically differs from the 21% federal statutory tax rate due primarily to New York Stateincome taxes, partially offset by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and to a much lesser degree, the utilization of low income housing tax credits. Other variances from the federal statutory federal tax rate are due to the effects of transitional adjustments related to state income taxes. In addition, the tax effects of certain incentive stock option activity may reduce the Company's effective tax rate on a sporadic basis. We maintain a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, we informed our employees of our decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. Pension and post-retirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events; including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated annual financial statements. The Company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities' impairment losses and other-than-temporary impairment ("OTTI") of equity securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities (both available-for-sale and held-to-maturity) portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is "more likely than not" we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is insufficient to recover the entire amortized cost basis. When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to whether OTTI is present. The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a nationally recognized statistical rating organization ("NRSRO"), and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies. The estimation of fair value is significant to several of our assets; including available-for-sale and marketable equity investment securities, intangible assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United Statesrequire disclosure of the fair value of financial instruments as a part of the notes to the annual audited consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, and the shape of yield curves. Fair values for securities available-for-sale are obtained from unaffiliated third party pricing services. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing sources. Fair values for marketable equity securities are based on quoted prices on a nationally recognized securities exchange for similar benchmark securities. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions. - 51 - -------------------------------------------------------------------------------- Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the results of the December 31, 2021evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. Management will continuously evaluate all relevant economic and operational factors potentially affecting the Bank or the fair value of its assets, including goodwill. Should the current pandemic, or the future economic consequences thereof, require a significant and sustained change in the operations of the Bank, re-evaluations of the Bank's goodwill valuation will be conducted on a more frequent basis.
March 25, 2022, the Company announced that its Board of Directors declared a cash dividend of $0.09per share on the Company's voting common and non-voting common stock, and a cash dividend of $0.09per notional share for the issued warrant relating to the fiscal quarter ended March 31, 2022. The dividend was payable to all shareholders of record on April 22, 2022and was paid on May 6, 2022.
Overview and results of operations
The following represents material highlights of the Company’s operating results between the first quarter of 2022 and the first quarter of 2021.
• Net profit increased
• Basic and diluted earnings per share were both
• The return on average assets increased by 22 basis points to 0.90%, the increase
in income exceeded the increase in average assets.
• Net interest income, after provision for loan losses, increased
million, or 24.3%, to
revenues have increased
interest income, after provision for loan losses, is mainly due to the
increase in the average balance of interest-earning assets, combined with a
decrease in the average rate paid on average bearing interest
Passives. These increases were offset by a decrease of 10 basis points in the
average return earned on the average balance of interest-bearing assets.
In addition, a reduction in the provision for loan losses of
reflective of improving asset quality metrics. The credit sensitive portfolios continue to be carefully monitored.
• Net interest margin for the first quarter of 2022 was 3.06%, a base of 21
point increase compared to 2.85% in the first quarter of 2021. This
the improvement reflects a 36 basis point decline in the average cost paid on
interest-bearing liabilities, with a decrease of 10 basis points in the
return earned on interest-bearing assets.
• The effective tax rate increased by 0.40% to 21.0% for the three months
2021. The increase in the tax rate in the first quarter of 2022, compared
in the same quarter of 2021, was mainly related to an increase in the
income and an increase of
created taxable income in excess of the state subject to the 7.25% tax rate.
The following reflects the significant changes in financial condition between
December 31, 2021and March 31, 2022. In addition, the following reflects significant changes in asset quality metrics between December 31, 2021, March 31, 2022and March 31, 2021.
• Total assets increased
2022, as compared to
December 31, 2021, primarily driven by higher investment securities' balances and loan balances.
• Asset quality metrics, as measured by net loan write-offs, remained stable,
compared to recent reporting periods. The annualized net loan
the ratio of write-offs to average loans was 0.02% for the first quarter of 2022,
compared to 0.05% for the first quarter of 2021 and 0.10% for the fourth
quarter of 2021. Non-performing loans to total loans decreased by 154
peak at 0.93% at
Non-performing loans to total loans fell 7 basis points to 0.93% at
the ratio of loan loss provision to non-performing loans was 163.8% at
March 31, 2022, as compared to 64.2% at March 31, 2021, and 156.0% at December 31, 2021. - 52 -
-------------------------------------------------------------------------------- The Company had net income of
$3.0 millionfor the three months ended March 31, 2022compared to net income of $2.2 millionfor the three months ended March 31, 2021. The $796,000increase in net income was due primarily to a $40,000increase in interest and dividend income, an $867,000decrease in interest expense, and a $926,000decrease in the provision for loan losses. Partially offsetting the increases to net income was a $242,000decrease in noninterest income, a $616,000increase in noninterest expense and a $172,000increase in income tax expense. Net interest income before the provision for loan losses increased $907,000, or 10.6%, to $9.5 millionfor the three months ended March 31, 2022as compared to $8.6 millionfor the same three month period in 2021. The increase was primarily a result of a 36 basis points decrease in the average cost of interest-bearing liabilities between the year-over-year first quarter periods. Further, the increase was a result of increases in average interest-earning asset balances, primarily in the investment categories, offset by a decrease in the average yield of interest-earning assets of 10 basis points to 3.54% for the three months ended March 31, 2022from 3.6% for the same three month period of the previous year. The increase in interest income was partially reduced in the three months ended March 31, 2022by reductions in the level of deferred PPP fee income recognized in the period due to the decreased levels of forgiveness in the three months ended March 31, 2022as compared to the same three month period in the previous year. In comparing the year-over-year first quarter periods, the return on average assets increased 22 basis points to 0.90% due to the combined effects of the increase in net income (the numerator in the ratio) and the increase in average assets (the denominator in the ratio). Average assets increased due to increases in average taxable securities of $21.0 millionand average tax-exempt securities of $20.5 millionin the first quarter of 2022, as compared to the same quarter of 2021. Average interest-bearing deposits increased $45.0 millionin the first quarter of 2022, as compared with the same quarter in 2021. Noninterest-bearing deposits totaled $199.2 millionat March 31, 2022, an increase of $18.7 million, or 10.4%, compared to March 31, 2021. The increases in noninterest-bearing deposits were primarily the result of the Bank's participation in the PPP, as well as ongoing growth in business banking relationships. In addition, the Bank has seen a general increase in the average account balance for consumer deposits consistent with similar increases generally reported throughout the industry. These increases are expected to be transitory and relate primarily to significant levels of economic stimulus combined with reduced levels of consumer spending related to the pandemic. At this time, it cannot be determined with certainty how long it will be before these deposits return to historically normal levels. For the first three months of 2022, we recorded $102,000in provision for loan losses as compared to $1.0 millionin the same prior year three month period. The provision is reflective of (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The decline in the provision for loan losses in the first quarter of 2022, as compared to the same period in the first quarter of 2021, was primarily related to the improvement in the qualitative factors used by the Company to determine the provision in 2022, as compared to the same period in the previous year. The improvement in these qualitative factors was due to observed improvements in economic conditions during the second half of 2021 and the first quarter of 2022 that followed the easing of the most restrictive phases of the COVID-19 pandemic that had existed in 2020 and the first half of 2021. The credit sensitive portfolios continue to be carefully monitored. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for loan losses.
Net interest income
Net interest income is the Company's primary source of operating income for payment of operating expenses and providing for loan losses. It is the amount by which interest earned on loans, interest-earning deposits, and investment securities, exceeds the interest paid on deposits and other interest-bearing liabilities. Changes in net interest income and net interest margin result from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, related yields, and associated funding costs. - 53 - -------------------------------------------------------------------------------- The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and resultant yield information in the tables has not been adjusted for tax equivalency. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations. (Unaudited) For the three months ended March 31, 2022 2021 Average Average Unaudited Average Yield / Average Yield / (Dollars in thousands) Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans
$ 845,461 $ 8,6924.11 % $ 849,676 $ 8,8474.16 % Taxable investment securities 329,291 2,168 2.63 % 308,259 2,063 2.68 % Tax-exempt investment securities 32,721 118 1.44 % 12,234 29 0.95 % Fed funds sold and interest-earning deposits 31,830 4 0.05 % 32,414 3 0.04 % Total interest-earning assets 1,239,303 10,982 3.54 % 1,202,583 10,942 3.64 % Noninterest-earning assets: Other assets 91,622 82,353 Allowance for loan losses (13,031 ) (13,057 ) Net unrealized (losses)/gains on available-for-sale securities (1,334 ) 1,314 Total assets $ 1,316,560 $ 1,273,193Interest-bearing liabilities: NOW accounts $ 106,894 $ 710.27 % $ 94,951 $ 570.24 % Money management accounts 16,072 4 0.10 % 15,597 4 0.10 % MMDA accounts 261,898 246 0.38 % 235,289 255 0.43 % Savings and club accounts 138,585 48 0.14 % 111,317 33 0.12 % Time deposits 377,907 596 0.63 % 399,176 1,178 1.18 % Subordinated loans 29,578 412 5.57 % 39,412 557 5.65 % Borrowings 63,528 138 0.87 % 85,070 298 1.40 % Total interest-bearing liabilities 994,462 1,515 0.61 % 980,812 2,382 0.97 % Noninterest-bearing liabilities: Demand deposits 199,164 180,442 Other liabilities 11,904 11,944 Total liabilities 1,205,530 1,173,198 Shareholders' equity 111,030 99,995 Total liabilities & shareholders' equity $ 1,316,560 $ 1,273,193Net interest income $ 9,467 $ 8,560Net interest rate spread 2.93 % 2.67 % Net interest margin 3.06 % 2.85 % Ratio of average interest-earning assets to average interest-bearing liabilities 124.62 % 122.61 % As indicated in the above table, net interest income, before provision for loan losses, increased $907,000, or 10.6%, to $9.5 millionfor the three months ended March 31, 2022as compared to $8.6 millionfor the same prior year period. This increase was due principally to the $36.7 million, or 3.1%, increase in the average balance of interest-earning assets, offset by a decrease of 10 basis points on the average yield earned on those assets. These positive factors on net interest income were partially offset by an increase in the average balance of interest-bearing liabilities of $13.7 million, or 1.4%. The negative effect of this increase in the average balance of interest-bearing liabilities on net interest income however, was partially offset by a decrease of 36 basis points on the average interest rate paid on those liabilities. In total, net interest margin increased 21 basis points to 3.06%. The following analysis should also be viewed in conjunction with the table below which reports the changes in net interest income attributable to rate and volume. - 54 - -------------------------------------------------------------------------------- Interest and dividend income increased $40,000, or 0.1%, to $11.0 millionfor the three months ended March 31, 2022compared to $10.9 millionfor the same three month period in 2021. This increase was due to an increase in the average balance of interest earning assets, which increased between the year-over-year first quarter periods by 3.1%, primarily as a result of an increase in the average balance of investment securities. The average balance of investment securities increased by $41.2 millionprimarily due to increased purchases of investment securities throughout the twelve months ended March 31, 2022. These increased investment security purchases were primarily funded by increased levels of customer deposits placed with the Bank during 2021. The decrease in the average yield earned on loans was primarily due to the recognition of deferred PPP fee income in the period due to the increased levels of forgiveness in the three month period ended March 31, 2022. PPP deferred fee recognition (recorded as an increase to loan interest income) was $278,000in the three months ended March 31, 2022as compared to $459,000for the same three month period in 2021. Please refer to the PPP tables above for the full impact of PPP loans on average loan yields. Interest expense for the three months ended March 31, 2022decreased $867,000, or 36.4%, to $1.5 millionwhen compared to the same prior year period. This decrease was primarily due to a 36 basis points decline in the cost of interest-bearing liabilities. Deposit interest expense decreased $562,000, or 36.8%, to $965,000due to a 28 basis points decrease in the annualized average rate paid on deposits to 0.43% for the three months ended March 31, 2022, as compared to 0.71% for the three months ended March 31, 2021. This was partially offset by a $45.0 millionincrease in the average balance of interest-bearing deposits during the same time periods due to increases in average consumer, business and municipal deposit balances. These increases in average deposit balances were substantially derived from the effects of the various economic stimulus programs instituted in response to the Covid-19 pandemic, principally the PPP program and significant stimulus grant payments made to various municipalities and municipal agencies within the Bank's customer base. This decrease in the average cost of deposits was primarily due to a 55 basis points decrease in the average rates paid on time deposits during the three months ended March 31, 2022, as compared to the same three month period in 2021, due to the general decline in market interest rates during 2021 after the first quarter of that year. Net interest income for the three months ended March 31, 2022was $9.5 million, compared to $9.7 millionfor the three months ended December 31, 2021. The average balance of interest-earning assets increased $54.2 millionfor the quarter ended March 31, 2022to $1,239 millionfrom $1,185 millionfor the quarter ended December 31, 2021. The net interest margin percentage decreased from 3.28% for the three months ended December 31, 2021to 3.06% for the three months ended March 31, 2022. The primary driver of the decrease in net interest income and margin was a $205,000, or 1.8%, decrease in interest dividend income to $11.0 millionfor the three months ended March 31, 2022compared to $11.2 millionfor the three months ended December 31, 2021. This decrease was primarily due to a $238,000quarter-over-quarter decline in loan income in the quarter ended March 31, 2022, as compared to the immediately preceding quarter, This decline in loan income was primarily due to $102,000in non-recurring settlement adjustments made in January of 2022, causing a quarter over quarter variance of $204,000in loan income. The nonrecurring settlement adjustments related to two purchased loan pools, with an aggregate amortized cost of $43.5 million, acquired in the fourth quarter of 2021. In addition, loan income in the three months ended March 31, 2022was lower than in the previous quarter as PPP deferred fee recognition (recorded as an increase to loan interest income) declined to $278,000in the three months ended March 31, 2022as compared to $408,000for the three months ended December 31, 2021. For the full year ended December 31, 2022, management projects a net interest margin of 3.13-3.18%. This is a forward looking projection relying on internal analyses performed by the Company's management. These analyses are based on the interest-earning assets and liabilities held on the Company's balance sheet at March 31, 2022. This projection considers both forecasted asset and liability repricing expectations as well as anticipated reinvestment rates for expected future asset and liability cash flows. The analyses were prepared in consideration of forward and spot Treasuryand swap markets observations at March 31, 2022. These markets are subject to frequent and potentially significant changes and, therefore, no absolute assurance can be made as to the accuracy of the resultant forward projections.
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume - 55 - -------------------------------------------------------------------------------- multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency. Please refer to the PPP table in the previous section for information on PPP loans and the impact on loan income for the three months ended
March 31, 2022and 2021. Three months ended March 31, 2022 vs. 2021 Increase/(Decrease) Due to Total Unaudited Increase (In thousands) Volume Rate (Decrease) Interest Income: Loans $ (47 ) $ (108 ) $ (155 )Taxable investment securities 312 (207 ) 105 Tax-exempt investment securities 68 21 89 Interest-earning deposits - 1 1 Total interest income 333 (293 ) 40 Interest Expense: NOW accounts 8 6 14 Money management accounts - - - MMDA accounts 116 (125 ) (9 ) Savings and club accounts 9 6 15 Time deposits (60 ) (522 ) (582 ) Subordinated loans (137 ) (8 ) (145 ) Borrowings (64 ) (96 ) (160 ) Total interest expense (128 ) (739 )
(867 ) Net change in net interest income
Provision for Loan Losses We establish a provision for loan losses, which is charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. The provision for loan losses represents management's estimate of the amount necessary to maintain the allowance for loan losses at an adequate level. Management extensively reviews recent trends in historical losses, qualitative factors and specific reserve needs on loans individually evaluated for impairment in its determination of the adequacy of the allowance for loan losses. We recorded
$102,000in provision for loan losses for the three month period ended March 31, 2022, as compared to $1.0 millionfor the three month period ended March 31, 2021. The provisioning in the first quarter of 2022 and 2021 reflects management's determination of prudent additions to reserves considering loan mix changes, concentrations of loans in certain business sectors, factors related to loan quality metrics, and continued COVID-19 related economic uncertainty. The decrease in the provision for loan losses in the first quarter of 2022, as compared to the same period in 2021, was primarily related to the improvement in the qualitative factors used by the Company to determine the provision in the first quarter of 2022, as compared to the previous year's first quarter. The improvement in these qualitative factors was due to observed improvements in economic conditions during 2022 that followed the easing of the most restrictive phases of the COVID-19 pandemic that had existed in 2021. The Company's credit-sensitive portfolios continue to be carefully monitored. The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of delinquent loans to total loans decreased to 2.12% at March 31, 2022as compared to 2.14% at December 31, 2021. Delinquent loans (numerator) increased $283,000while total loan balances (denominator) increased $23.1 millionat March 31, 2022, as compared to December 31, 2021. The increase in past due loans was primarily driven by an increase - 56 - -------------------------------------------------------------------------------- of $1.4 millionin loans delinquent 60-89 days, partially offset by a $761,000decrease in loans delinquent 30-59 days past due, and a $318,000decrease in loans delinquent 90 days and over. At March 31, 2022, there were $18.1 millionin loans past due including $4.5 millionin loans 30-59 days past due, $6.0 millionin loans 60-89 days past due and $7.7 millionin loans 90 or more days past due. At December 31, 2021, there were $17.9 millionin loans past due including $5.2 millionin loans 30-59 days past due, $4.6 millionin loans 60-89 days past due and $8.0 millionin loans 90 or more days past due. Noninterest Income
The Company’s non-interest income primarily includes commissions on deposit account balances and transactions, loan servicing, commissions, including insurance agency commissions, and net gains on sales securities, loans and seized real estate.
The following table sets forth certain information on noninterest income for the periods indicated: Unaudited For the three months ended (Dollars in thousands) March 31, 2022 March 31, 2021 Change Service charges on deposit accounts $ 259 $ 331
$ (72 )-21.8 % Earnings and gain on bank owned life insurance 162 125 37 29.6 % Loan servicing fees 117 90 27 30.0 % Debit card interchange fees 228 221 7 3.2 % Insurance agency revenue 299 280 19 6.8 % Other charges, commissions and fees 413 243 170 70.0 % Noninterest income before (losses) gains 1,478 1,290 188 14.6 % Net gains on sales of securities, fixed assets, loans and foreclosed real estate 57 321 (264 ) -82.2 % Gains on marketable equity securities 68 234 (166 ) -70.9 % Total noninterest income $ 1,603 $
First quarter 2022 noninterest income was
$1.6 million, a decrease of $242,000, or 13.1%, compared to $1.8 millionfor the same three-month period in 2021. The decrease in noninterest income, as compared to the same quarter of the previous year, was primarily due to a $201,000non-recurring gain, recorded in the first quarter of 2021, related to the Bank's sale of land previously held for development. Noninterest income categorized as recurring noninterest income was $1.5 millionfor the first quarter of 2022, reflecting a $188,000, or 14.6%, improvement over the first quarter of the prior year. Recurring noninterest income excludes unrealized gains on equity securities, gains on sales of loans, foreclosed real estate, and premises and equipment, as well as losses on investment securities. Offsetting these increases in noninterest income before (losses) and gains for the three month period, were decreases of $264,000in gains on sales of securities, fixed assets, loans and foreclosed real estate, and a $166,000decrease in gains on marketable equity securities in the quarter ended March 31, 2022, as compared to the prior year in the same quarter. - 57 - --------------------------------------------------------------------------------
Noninterest Expense The following table sets forth certain information on noninterest expense for the periods indicated: Unaudited For the three months ended (Dollars in thousands) March 31, 2022 March 31, 2021 Change Salaries and employee benefits $ 4,049 $ 3,341
$ 70821.2 % Building and occupancy 826 793 33 4.2 % Data processing 550 676 (126 ) -18.6 % Professional and other services 393 417 (24 ) -5.8 % Advertising 187 246 (59 ) -24.0 % FDIC assessments 222 198 24 12.1 % Audits and exams 141 202 (61 ) -30.2 % Insurance agency expense 204 206 (2 ) -1.0 % Community service activities 62 88 (26 ) -29.5 % Foreclosed real estate expenses 13 6 7 116.7 % Other expenses 605 463 142 30.7 % Total noninterest expenses $ 7,252 $
Total noninterest expense for the first quarter of 2022 was
$7.3 million, an increase of $616,000, or 9.3%, compared to $6.6 millionfor the same three-month period in 2021. The increase was primarily driven by increases in salaries and employee benefits expense of $708,000, or 21.2%. The $708,000year-over-year increase in salaries and employee benefits expense was comprised of a $239,000reduction in deferrals of personnel-related loan origination costs, a $207,000, or 7.9%, increase in salaries, a $206,000increase in incentives expense and a $56,000net increase in all other salaries and employee benefits expenses. The $239,000reduction in personnel-related costs deferred under generally accepted accounting principles in the first quarter of 2022, as compared to the same quarter in 2021, related to reduced levels of PPP loans loan originated in 2022 as compared to the previous year. The Company originated no PPP loans in the first quarter of 2022, as compared to $34.5 millionin the first quarter of 2021. The $207,000increase in salaries expense was primarily due to increases in individual salaries, effective in the first quarter of 2022, as well as modest additions to staff headcount. The Company increased its salary structure for employees, where deemed to be appropriate, in late 2021 and early 2022 in order to effectively respond to inflationary and competitive pressures within our marketplace relative to the recruitment and retention of talent. The $206,000increase in incentives expense in the first quarter of 2022, as compared to the same quarter in 2021, was primarily due to reductions in the amounts paid in the first quarter of 2021 for management and sales incentives in response to reduced sales and business activity in 2020 as a result of the pandemic and adjustments made to the Bank's performance incentive plans. Management believes that the level of incentive expense in the first quarter of 2022 is indicative of the quarterly level of such expenses expected for the remainder of 2022. Partially offsetting the increase in salaries and employee benefits expense was a $126,000, or 18.6%, reduction in data processing expenses, primarily the result of a reduction in ATM processing fees that was in turn primarily driven by third-party vendor refunds obtained through contract renegotiation activities. At March 31, 2022, the Bank serviced 507 residential mortgage loans in the aggregate amount of $52.0 millionthat have been sold on a non-recourse basis to FNMA. FNMAis the only unrelated third-party that has acquired loans originated by the Bank. On an infrequent basis, loans previously sold to FNMAthat subsequently default may be found to have underwriting defects that place the loans out of compliance with the representations and warranties made by the Bank. This can occur at any time while the loan is outstanding. In such cases, the Bank is required to repurchase the defaulted loans from FNMA. Repurchase losses sustained by the Bank include all costs incurred by FNMAas part of the foreclosure process, including items such as delinquent property taxes and legal fees. No such claims against the Bank were made by FNMAin the three month periods ended in either March 31, 2022or March 31, 2021. Management - 58 - --------------------------------------------------------------------------------
continues to monitor the underwriting standards applied to all residential mortgage loan originations and subsequent sales through its quality control processes and views these events and their related expenses as isolated cases.
income tax expense
Income tax expense increased
$172,000to $721,000, with an effective tax rate of 21.0%, for the quarter ended March 31, 2022, as compared to $549,000, with an effective tax rate of 20.6%, for the same three month period in 2021. The increase in income tax expense in the current quarter, as compared to the same quarter in 2021, was primarily attributable to the year-over-year quarterly increase in pre-tax net income. The federal statutory rate applied to pretax income was 21% for the three month periods ended March 31, 2022and 2021. On April 7, 2021, the New York State Legislatureapproved comprehensive tax legislation as part of the State's 2022 Fiscal Year budget. The legislation includes increased taxes on businesses and high-income individuals among other tax law revisions. Other provisions include amendments to the real estate transfer tax. The legislation increases the corporate franchise tax rate to 7.25% from 6.5% for tax years beginning on or after January 1, 2021and before January 1, 2024for taxpayers with a business income base greater than $5.0 million. In addition, the previously scheduled phase-out of the capital base tax has been delayed. The rate of the capital base was to have been reduced to 0% starting in 2021. The legislation imposes the tax at the rate of 0.1875% for tax years beginning on or after January 1, 2021and before January 1, 2024, with the 0% rate to take effect in 2024. Management continues to evaluate the impact of this amended New York Statetax legislation on the Company's financial condition and results of operations and has incorporated these analyses into the recorded effective tax rate for the three months ended March 31, 2022. The Company's effective tax rate of 21% is due primarily to increased pretax income, New York Stateincome taxes, partially offset by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits. Other variances from the federal statutory federal tax rate are due to the effects of transitional adjustments related to state income taxes. In addition, the tax effects of certain incentive stock option activity may reduce the Company's effective tax rate on a sporadic basis.
Earnings per share
Basic and diluted earnings per share were
$0.49per share for the first quarter of 2022, as compared to $0.36per basic and diluted share for the same quarter of 2021. The increase in earnings per share between these two periods was due to the increase in net income between these two time periods. Further information on earnings per share can be found in Note 3 of this Form 10-Q.
Changes in financial situation
Total assets increased
$43.2 million, or 3.4%, to $1.33 billionat March 31, 2022as compared to $1.29 billionat December 31, 2021. This increase was due primarily to increases in loans and investment securities. Loans totaled $855.6 million, an increase of $23.1 millioncompared to $832.5 millionat December 31, 2021. Primarily due to increases of $14.4 millionin commercial real estate loans and $14.0 millionin commercial business loans. Investment securities increased $14.5 million, or 4.1%, to $370.9 millionat March 31, 2022, as compared to $356.4 millionat December 31, 2021, due principally to purchases of securities during the first three months of 2022, that were only partially offset by sales and redemptions of securities and unrealized losses in the portion of the investment portfolio characterized as available-for-sale. Liabilities Total liabilities increased $44.4 million, or 3.8%, to $1.22 billionat March 31, 2022, compared to $1.17 billionat December 31, 2021. Deposits increased $58.7 million, or 5.6%, to $1.11 billionat March 31, 2022, compared to $1.06- 59 - -------------------------------------------------------------------------------- billion at December 31, 2021. Interest-bearing deposits were the primary driver of growth between the comparable periods and totaled $909.3 millionat March 31, 2022, an increase of $45.9 million, or 5.3% from the 2021 year-end. Borrowed funds balances from the FHLB-NY decreased $14.6 million, or 18.9%, to $62.5 millionat March 31, 2022from $77.1 millionat December 31, 2021as the Bank primarily used net incoming deposit cash flows to repay borrowings at their scheduled maturity dates. Shareholders' Equity The Company's shareholders' equity, exclusive of the noncontrolling interest, decreased $1.2 million, or 1.1%, to $109.1 millionat March 31, 2022, from $110.3 millionat December 31, 2021. This decrease was principally due to a $3.8 millionincrease in accumulated other comprehensive loss. Partially offsetting this increase in in accumulated other comprehensive loss was an increase in retained earnings of $2.4 million, or 3.9%, to $63.4 millionat March 31, 2022, from $60.9 millionat December 31, 2021. Comprehensive loss increased primarily as the result of increases in the unrealized losses on the available-for sale investment portfolio in the three months ended March 31, 2022as a result of increases in market interest rates.
Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company's goal is to maintain a strong capital position, consistent with the risk profile of its banking operations. This strong capital position serves to support growth and expansion activities while at the same time exceeding regulatory standards. At
March 31, 2022, the Bank met the regulatory definition of a "well-capitalized" institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Actions ("PCA") standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. At March 31, 2022, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements. As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a "Community Bank Leverage Ratio" (the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A "qualifying community bank" that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered "well capitalized" under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. A financial institution can elect to be subject to this new definition. The Bank did not elect to become subject to the Community Bank Leverage Ratio.
- 60 - --------------------------------------------------------------------------------
Minimum To Be Minimum For "Well-Capitalized" Minimum For Capital Adequacy Under Prompt Capital Adequacy Actual Purposes Corrective Provisions with Buffer
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of
March 31, 2022: Total Core Capital(to Risk-Weighted Assets) $ 132,74115.29 % $ 69,4538.00 % $ 86,81610.00 % $ 91,15710.50 % Tier 1 Capital (to Risk-Weighted Assets) $ 121,86214.04 % $ 52,0896.00 % $ 69,4538.00 % $ 73,7938.50 % Tier 1 Common Equity (to Risk-Weighted Assets) $ 121,86214.04 % $ 39,0674.50 % $ 56,4306.50 % $ 60,7717.00 % Tier 1 Capital (to Assets) $ 121,8629.29 % $ 52,4604.00 % $ 65,5755.00 % $ 65,5755.00 % As of December 31, 2021 Total Core Capital(to Risk-Weighted Assets) $ 129,16615.19 % $ 68,0138.00 % $ 85,01610.00 % $ 89,26610.50 % Tier 1 Capital (to Risk-Weighted Assets) $ 118,51113.94 % $ 51,0096.00 % $ 68,0138.00 % $ 72,2638.50 % Tier 1 Common Equity (to Risk-Weighted Assets) $ 118,51113.94 % $ 38,2574.50 % $ 55,2606.50 % $ 59,5117.00 % Tier 1 Capital (to Assets) $ 118,5119.52 % $ 49,8044.00 % $ 62,2555.00 % $ 62,2555.00 % Non-GAAP Financial Measures Regulation G, a rule adopted by the Securities and Exchange Commission(SEC), applies to certain SECfilings, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company's reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEChas exempted from the definition of "non-GAAP financial measures" certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary bank are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC. The Company provides, below, an explanation of the calculations, as supplemental information, for non-GAAP measures included in the consolidated annual financial statements. In addition, the Company provides a reconciliation of its subsidiary bank's disclosed regulatory capital measures, below. - 61 - --------------------------------------------------------------------------------
March 31, December 31, (Dollars in thousands) 2022 2021 Regulatory Capital Ratios (Bank Only) Total capital (to risk-weighted assets) Total equity (GAAP)
$ 131,569 $ 121,896Goodwill (4,536 ) (4,536 ) Intangible assets (113 ) (117 ) Addback: Accumulated other comprehensive income (5,058 )
Total Tier 1 Capital
Allowance for loan and lease losses 10,879 10,655 Total Tier 2 Capital
$ 10,879 $ 10,655Total Tier 1 plus Tier 2 Capital (numerator) $ 132,741 $ 129,166Risk-weighted assets (denominator) 868,158
Total core capital to risk-weighted assets 15.29 %
Tier 1 capital (to risk-weighted assets) Total Tier 1 capital (numerator)
Risk-weighted assets (denominator) 868,158
Total capital to risk-weighted assets 14.04 %
Tier 1 capital (to adjusted assets) Total Tier 1 capital (numerator)
$ 121,862 $ 118,511Total average assets 1,316,158 1,249,752 Goodwill (4,536 ) (4,536 ) Intangible assets (113 ) (117 ) Adjusted assets (denominator) $ 1,311,509 $ 1,245,099Total capital to adjusted assets 9.29 %
Tier 1 Common Equity (to risk-weighted assets) Total Tier 1 capital (numerator)
Risk-weighted assets (denominator) 868,158 850,157 Total Tier 1 Common Equity to risk-weighted assets 14.04 % 13.94 %
Quality of Loans and Assets and Allowance for Loan Losses
The following table represents information regarding the total amount of outstanding loans on the dates indicated:
March 31, December 31, March 31, (Dollars In thousands) 2022 2021 2021 Nonaccrual loans: Commercial and commercial real estate loans
$ 5,567 $ 6,297 $ 17,842Consumer 1,283 1,104 602 Residential mortgage loans 1,098 891 2,899 Total nonaccrual loans 7,948 8,292 21,343 Total nonperforming loans 7,948 8,292 21,343 Foreclosed real estate - - - Total nonperforming assets $ 7,948 $ 8,292 $ 21,343Accruing troubled debt restructurings $ 3,926$
Nonperforming loans to total loans 0.93 % 1.00 % 2.47 % Nonperforming assets to total assets 0.60 %
Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings ("TDR"), and foreclosed real estate (''FRE"). The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest. Loans are considered modified in a TDR when, due to a borrower's - 62 -
-------------------------------------------------------------------------------- financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the categories of nonaccrual loans or accruing TDRs. There was one TDR loan in nonaccrual status at
March 31, 2022. Pursuant to the CARES Act, financial institutions had the option to temporarily suspend certain requirements under U.S.generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020and January 1, 2022. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the CARES Act. As indicated in the table above, nonperforming assets at March 31, 2022were $7.9 millionand were $344,000lower than the $8.3 millionreported at December 31, 2021and $13.4 millionlower than the reported $21.3 millionat March 31, 2021. The decrease at March 31, 2021was due primarily to a decrease in commercial and commercial real estate loans of $12.3 millionand a decrease of $1.8 millionin residential mortgage loans. This decrease was partially offset by an increase of $681,000in nonperforming consumer loans. Fair values for commercial FRE are initially recorded based on market value evaluations by third parties, less costs to sell ("initial cost basis"). On a prospective basis, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate's fair value less costs to sell. Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis for the FRE property. The allowance for loan losses represents management's estimate of the probable losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for loan losses was $13.0 millionand $12.9 millionat March 31, 2022and December 31, 2021, respectively. The ratio of the allowance for loan losses to total loans decreased 3 basis points to 1.52% at March 31, 2022from 1.55% at December 31, 2021. Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of March 31, 2022. The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. The measurement of impaired loans is generally based upon the fair value of the collateral, with a portion of the impaired loans measured based upon the present value of future cash flows discounted at the historical effective interest rate. A specific reserve is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral. For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or broker price opinions. When a loan is determined to be impaired, the Bank will reevaluate the collateral which secures the loan. For real estate, the Company will obtain a new appraisal or broker's opinion whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from a firm able to provide such an evaluation. Collateral will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years. Appraised values and broker opinion values are discounted due to the market's perception of a reduced price of Bank-owned property and the Bank's desire to sell the property more quickly to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. At March 31, 2022and December 31, 2021, the Company had $11.2 millionand $11.4 millionin loans, respectively, which were deemed to be impaired, having established specific reserves of $2.0 millionand $1.9 million, respectively, on these loans. - 63 -
-------------------------------------------------------------------------------- Management has identified potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in those loans being included in future impaired loan reporting. Potential problem loans totaled
$42.4 millionas of March 31, 2022, a decrease of $1.3 million, or 3.0%, as compared to $43.7 millionat December 31, 2021. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired.
Appraisals are obtained at the time a secured home loan is created. For commercial real estate held as collateral, the property is inspected every two years.
In the normal course of business, the Bank sells residential mortgage loans and has infrequently sold participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyers of these loans or loan participations. The Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal. The future performance of the Company's loan portfolios with respect to credit losses will be highly dependent upon the course and duration, both nationally and within the Company's market area, of the public health and economic factors related to the pandemic, as well as the concentrations in the Company's loan portfolio. Concentrations of loans within a portfolio that are made to a single borrower, to a related group of borrowers, or to a limited number of industries, are generally considered to be additional risk factors in estimating future credit losses. Therefore, the Company monitors all of its credit relationships to ensure that the total loan amounts extended to one borrower, or to a related group of borrowers, does not exceed the maximum permissible levels defined by applicable regulation or the Company's generally more restrictive internal policy limits.
Liquidity management involves the Company's ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit composition and balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements. The Company's liquidity has been enhanced by its ability to borrow from the
Federal Home Loan Bank of New York("FHLBNY"), whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense and/or losses on the sale of securities or loans. Through the first three months of 2022, as indicated in the consolidated statement of cash flows, the Company reported net cash flow from operating activities of $4.1 millionand net cash outflow of $47.8 millionrelated to investing activities. The net cash outflow from investing activities primarily was due to a $23.8 millionincrease in net investment activity, a $23.4 millionincrease in net loan activity and a $635,000net increase in all other investing activities in aggregate. The Company reported net cash flows from financing activities of $43.8 milliongenerated principally by increased customer deposit balances of $58.8 million, partially offset by a $14.6 milliondecrease in net borrowings, and an aggregate decrease in net cash of $384,000from all other financing sources, including dividends paid to common voting and non-voting shareholders and warrants of $428,000. The Company has a number of existing credit facilities available to it. At March 31, 2022, total credit available to the Company under the existing lines of credit was approximately $146.9 millionat FHLBNY, the Federal Reserve Bank, and two other correspondent banks. As of March 31, 2022, the Company had $62.5 millionof the available lines of credit utilized on its existing lines of credit with $84.4 millionavailable. - 64 - --------------------------------------------------------------------------------
Off-balance sheet arrangements
The Company is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. At
March 31, 2022, the Company had $237.2 millionin outstanding commitments to extend credit and standby letters of credit.
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